Day Trading & Pattern Day Trading

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stock market, day trading, pattern day trader, day trading & pattern day trading
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Day Trading & Pattern Day Trading

Say you’re a small time investor and looking to flip a few stocks to maximize your gains.  Great, right?  There are some rules that you need to first know about day trading & pattern day trading before you start buying and selling stocks all willy nilly.

The FINRA (Financial Industry Regulatory Authority) has set laws for day traders.

If you have less than $25k in your account, you are allowed 3 day trades within 5 trading days.  After that, you are marked a pattern day trader.  This means that you are no longer allowed to make a day trade for 90 days or until your account is over $25k.  You can still make trades, just no more day trades.

So, what counts as a day trade?

If you “open” a transaction and then “close” a transaction, that counts as a day trade.

For example:

  • Buy 1000 shares of XYZ
  • Sell 1000 shares of XYZ

This is ONE daytrade

  • Buy 1000 shares of XYZ
  • Sell 500 shares of XYZ
  • Sell 500 shares of XYZ

This is still ONE daytrade, though the sells were done in two separate transactions.

Alternatively,

  • Buy 500 shares of XYZ
  • Buy 500 shares of XYZ
  • Sell 1000 shares of XYZ

This is TWO daytrades, as you opened two transactions, and closed them both in one sell transaction.

  • Buy 500 shares of XYZ
  • Buy 500 shares of XYZ
  • Sell 600 shares of XYZ

This is still TWO daytrades, as a part of the second transaction was closed.

  • Buy 100 shares of XYZ
  • Buy 100 shares of XYZ
  • Buy 800 shares of XYZ
  • Sell 400 shares of XYZ

This is THREE daytrades, as three transactions were opened, and the one sell closed the first two buys and closed a part of the third buy.

What if you bought some the day before?

Let’s say you had 1000 shares of XYZ from a previous day.

  • Sell 1000 shares of XYZ

And then you decide that the price has plummeted and you want to get back in

  • Buy 1000 shares of XYZ

This is a day trade as well.

Buy/Sell or Sell/Buy constitutes a day trade.

Hope that explains a little bit of day trading.

We have many upcoming guides coming up, please feel free to check our guide repository here.

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